The incoming subcontracting tax bombshell

Our front-page story will make for very uncomfortable reading for principals, chief executives and accountants at hundreds of colleges and training providers.

In fact, a mild panic may set in after reading that HMRC has tasked over 20 of their specialist inspectors to sniff out unpaid VAT on management fees for subcontracting.

And all the evidence we’ve seen suggests this will come as a huge bombshell to the sector, especially for colleges, as very few of them chargesubcontractors the required VAT.

It is honestly quite shocking to me that so few people in the sector knew that VAT was meant to be applied in this way. Perhaps HMRC should bear some of the blame for leaving the situation so murky?

Exactly how much unpaid VAT and over how many years is not known, but some basic analysis of the few subcontracting figures that are available suggests the tax office should expect to receive around £40 million per year in VAT on top- sliced management fees.

This guestimate is based on 20 per cent VAT for £200 million in management fees on £1 billion in subcontracting. And I’ve arrived at that last amount because, as in May last year, the ESFA’s list of self-declared subcontracting for apprenticeships, ESF and AEB amounted to just over £800 millionacross 504 prime providers and 1,308 subcontractors.

Plus, in 2015/16 there were over 27,000 16- to 18-year-olds on study programmes across 317 prime providers and 627 subcontractors according to the ESFA’s list published last July.

There is no way to sugar-coat this: the final VAT bill over the past six or more years, plus fines, could run into the many hundreds of millions of pounds.

Feedback

Mike Farmer

How much of this subcontracting was forced on the sector by the government (LSC) imposing minimum contract values? Essentially it transferred management responsibilities from government to the prime contractors. Government must shoulder some of the blame for this.

Christine

Adrian Bouckley

Just checked the date to ensure this isn’t an early April Fools story.

All that will happen here is that every subcontractor who isn’t already registered for VAT will voluntarily register allowing you to reclaim VAT from the last 4 years. This will result in a huge increase in bureaucracy and a net loss to HMRC. Very few training providers would only have exempt services even if the majority would be under the £85k VAT.

This is an entirely different situation to the VAT situation on advanced learner loans and hopefully the 20 special investigators will quickly be stood down!